The boss of Italian carmaker Fiat has warned that Europe's embattled car
industry will 'unravel' unless the European Union steps into co-ordinate
urgent cuts in capacity across the continent.

Sergio Marchionne, who is also chief executive of US carmaker Chrysler, said that the biggest carmakers in Europe probably lost about €5bn in 2012 as sales in the region fell for a fifth straight year.

With sales forecast to decline for a sixth year in 2013, most experts believe that the industry needs to embark on significant retrenchment to better match the weakened state of demand from drivers. "I've been an advocate of European intervention in the sector which allows an equitable distribution of the reductions over the countries," Mr Marchionne said at the Detroit Car Show on Tuesday.

The absence of any co-ordination by the European Commission, Mr Marchionne argued, will lead to cuts being made in a "haphazard" way that will see governments put their national interests above the greater good of Europe's car industry.

Europe has again been the biggest headache at the annual gathering in Detroit, where executives have been optimistic about the prospects for both the US and Asian markets in 2013.

Fiat, which acquired a 60pc stake in Chrysler after the US carmaker plunged into bankruptcy in 2009, expects to have lost €700m in Europe last year.

"Ultimately, this whole thing will unravel," said. Mr Marchionne, one of the industry's most high-profile executives. "If there are no cars to be bought, you can't make cars. You don't need to go to Harvard Business School to figure this out."

Fiat, Peugeot-Citreon and Renault have all estimated that the European car industry has about 20pc too much capacity, but factory and plant closures have so far been limited as carmakers faces intense pressure from European governments not to act.

Mr Marchionne said that Europe needs to take lessons from the collapse of the US car industry in late 2008, when General Motors, Ford and Chrysler all restructured. There was, he said "a stench of death" at the Detroit show in January 2009 that has since been replaced by optimism.

"The more difficult question is whether Europe is willing to learn the lesson - you need to rebase your business and resize that allows you do deal with the current reality and not a hyper-inflated expectation of volume," he said.

European car sales will drop to about 12m this year, according to the European Automobile Manufacturers Association, down from more than 17m before the financial crisis hit in 2008.

Despite their success in the US, Ford and GM's European operations are both continuing to lose money. Ford has warned that between last year and this it will lose about $3bn. Meanwhile, GM does not expect its European operations, which include two factories in the UK, to break even until the middle of the decade.

Mr Marchionne signalled that the US carmakers are unlikely to allow their European operations to lose money indefinitely. "You've got a successful set of businesses being run in Detroit," the Italian chief executive said. "They're forced to deal with the European situation that is substantially eroding their performance."